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FTX Flipped One Trading Firm’s Risk Obsession. Disaster Followed

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(Bloomberg) — Before a cadre of Jane Street Group alumni spectacularly scorched the cryptocurrency landscape from their perch at FTX this month, the Wall Street firm was enjoying its status as the behemoth almost nobody knew about.

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The more-than 2,000 employee powerhouse based in lower Manhattan is known among peers for its obsession with risk and preference for stealth. It digs into the health of trading partners, models potential catastrophes, autopsies losses and restricts staff from commenting publicly, because even that poses a danger.

The easiest way to describe the culture that Sam Bankman-Fried created at FTX: The opposite.

As the story unspools of the epic collapse of FTX, the $32 billion crypto exchange now in bankruptcy, one of the biggest revelations is that founder and former leader Bankman-Fried recruited an inner circle from some of the most serious employers around Wall Street and Silicon Valley and built such a haphazard operation.

Fellow Jane Street defectors included his one-time romantic partner Caroline Ellison, who ran the Alameda Research investment arm, and Brett Harrison, who oversaw FTX US. Sam Trabucco, who co-led Alameda for a time with Ellison before announcing his departure in August, was a trader at Susquehanna International Group. Technology head Gary Wang and engineering chief Nishad Singh hailed from Google and Facebook, respectively. FTX’s chief operating officer, Constance Wang, previously worked at Credit Suisse Group AG.

Jane Street should have been an ideal training ground. On Wall Street, the proprietary trading shop is considered a premier employer of quants and techies, priding itself on catching big, complex risks that the rest of the market misses. It’s been trading crypto for half a decade.

Despite such pedigrees, a growing pile of evidence — now laid out in bankruptcy court — shows key parts of FTX lacked adequate risk controls and bookkeeping. Secret financial ties and privileges for Alameda alarmed investors and employees alike. FTX is now the subject of a criminal probe. And a tally of its assets shows a “substantial amount” is either missing or stolen, a lawyer for firm told the bankruptcy court Tuesday. That case involves more than a million creditors.

“When billions of dollars are changing hands, this isn’t a child’s game of Monopoly,” said Ty Gellasch, CEO of the Healthy Markets Association, an advocacy group. “You have to have record keeping that looks better than a high school kid’s lemonade stand.”

An FTX representative didn’t respond to a message seeking comment, and a spokesman for Jane Street declined to comment.

When Vox messaged Bankman-Fried last week to ask where the trouble began, he blamed “messy accounting” and said he “didn’t realize the full size of it until a few weeks ago.”

“I didn’t mean for any of this to happen,” he wrote in a letter to employees Tuesday. “And I would give anything to be able to go back and do things over again.”

Doomsday Trade

Bankman-Fried spent three years at Jane Street, and there’s no black mark — or what’s known in the industry as a “disclosure event” — in his sparse employment records with brokerage regulators.

The firm starts indoctrinating new traders into its mania with risk the moment they arrive, according to people with knowledge of its practices. Its leaders allocate an unusually thick slice of capital to hedging and even maintain a doomsday trade in case the US stock market craters.

Traders at Jane Street are known to stay late, socialize over chess and go on outings to escape rooms. But above all, its leaders expect they will maintain a level of loyalty that was more common in Wall Street’s era of partnerships, when a firm’s interests always came first and discretion was paramount, according to people close to the company. Managers wouldn’t be comfortable with employees who form a clique or champion a competing calling.

At FTX, Bankman-Fried embraced a different approach, preaching effective altruism, a dedication to earning as much money as possible and then giving it all away. Eventually, he shacked up in a Bahamas penthouse with fellow employees, who in a number of cases dated coworkers.

While Jane Street shows off a code-breaking enigma machine, FTX had video games during work hours. Bankman-Fried himself was known to play League of Legends in key meetings.

And then there was his embrace of the spotlight.

Bankman-Fried’s Alameda made waves in 2019 after listing itself on the BitMex exchange’s leader board. It was a conspicuous move even by crypto’s norms, with traders generally preferring nom-de-plumes in rankings to avoid attracting hackers or home-invasion robberies.

Contacted by a Bloomberg reporter at the time, Bankman-Fried said casting off anonymity was strategic — a way of broadcasting his team’s clout in the market as it prepared to launch FTX. Two Alameda accounts were among the board’s top 10 most successful by lifetime profits.

Indeed, FTX’s ascent was rapid.

Read more: Billion-dollar-a-day crypto trader finds accolades top anonymity

Late that year, venture capitalist Edith Yeung stopped by the Peninsula luxury hotel in Hong Kong to introduce a government official to Bankman-Fried, the then-27-year-old running her latest investment. He and his colleagues, awaiting another funding round, were renting a penthouse suite with a prime view of the city.

It was the middle of a party when Yeung arrived, she recalled in an interview with Bloomberg prior to the collapse of FTX. “I remember having this guy who’s suit-and-tie and when we walked in, they were playing beer pong,” said Yeung, a general partner at Race Capital. The official turned to her and asked, ‘“You invested in these kids?”’

As FTX’s market share soared, so too did Bankman-Fried’s public persona. Soon he was everywhere, directly addressing regulators and lawmakers, while FTX bought ads and the naming rights to a stadium.

In Bankman-Fried, authorities saw someone who could help bridge crypto and Wall Street. He launched into his congressional testimony at a hearing last December by mentioning his stint as a quantitative trader. Soon he boasted that his firm offered robust around-the-clock oversight of risk, which he said anyone could check by monitoring its data.

“Unlike the traditional financial ecosystem where risk builds up overnight, where there needs to be separate risk models for weekends and overnight activity and holidays, where hours can go by with no ability to mitigate risk to the system, we have a transparent system,” he said.

Feeling Ghosted

The reality was that FTX ignored some of Wall Street’s routine conventions. Messages and documents shared in FTX Slack channels automatically deleted in regular intervals, according to people familiar with the matter. Outsiders sometimes roamed the workplace. People at firms that FTX struck deals with, and developers building on the Solana blockchain projects it supported, could come work and hang out in its offices.

FTX’s organization chart sometimes obscured the special status of Bankman-Fried’s inner circle, current and former employees said. They were the ones with access to vital information, while other top-tier executives grumbled about being left in the dark — including about Alameda’s relationship to FTX.

Ellison, who knew Bankman-Fried from their time at Jane Street, was promoted to co-CEO of Alameda in 2021 when he stepped back from daily management of that business to focus on FTX. For a time, they were romantically involved as they led their respective businesses, according to the people familiar with the situation, asking not to be named discussing private information.

Considering her lack of leadership experience, her appointment was surprising, one of the people said. Compared with him, she sent fewer tweets and rarely spoke to the press.

Meanwhile, people working in some of FTX’s many side ventures struggled to reach Bankman-Fried for key decisions, according to another former executive. Over the past few months, he was especially uncommunicative. Top lieutenants felt ghosted and privately fretted about finances. In one case, part of the firm nearly missed payroll. In another, bonuses were delayed.

Diverging Fates

Crypto traders could have used a doomsday trade heading into this year’s rout. At FTX, a $60 billion mountain of collateral dwindled to $9 billion, Bankman-Fried wrote in his letter Tuesday. He pointed to a combination of a credit squeeze, a selloff in virtual coins and a “run on the bank.”

As part of the bankruptcy, the firm is being led by John J. Ray III, who oversaw the liquidation of Enron Corp. In a filing last week, he decried FTX’s corporate controls and its “complete absence of trustworthy financial information.”

FTX lacked a system for forecasting how much cash it would have available as revenue came in and bills got paid, Ray wrote. Not all of its main business silos were audited, and one that was performed was conducted by “a firm with which I am not familiar,” he said, noting that it recently announced a metaverse headquarters in Decentraland.

Ultimately, outcomes at Jane Street and FTX diverged: When the Covid-19 pandemic erupted in the US in early 2020, Jane Street’s revenue soared 54% to $10.6 billion in the 12 months that followed. When crypto prices slumped this year, and the depth of its entanglements with Alameda surfaced, FTX collapsed.

But Bankman-Fried’s unraveling still had an unwelcome impact on Jane Street, elevating its profile. Google Trends, a tool for tracking the public’s interest, shows searches for its name started climbing early this month.

–With assistance from Olga Kharif and Yueqi Yang.

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©2022 Bloomberg L.P.

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